Mark and I got the news last night, here on our trip to the JumpStart Conference in Pittsburgh, that our clients in Newport and Astoria, Oregon won $3.6 million in the Connect Oregon grant process.  We wrote the grant application earlier this year, in support of bringing new air service from Portland International (PDX) to both cities on the Oregon Coast.  Neither one has had commercial air service for several years.  Now the work begins to identify and select a carrier to provide service on the route.

The Connect Oregon grant award underscores our work with governmental agencies - from the smallest cities and counties in the most remote parts of the west, to the largest state governments in the east, and the federal government’s Department of Transportation.  We’ve won more than $7 million in grants over the last five years for our client airports.

This morning, in Pittsburgh, we’ll get a legislative update from the experts at Airports Council International - North America (ACI-NA), and later today we’ll get a briefing on the state of the industry from airline leaders, themselves.

As always, let us know if you have any questions.  The best way to get me is by e-mail: jack@sixelconsulting.com.

Jack Penning, Analyst

ABOARD US AIRWAYS FLIGHT 1180:  I’m at 35,000 (at least that’s what the captain told us a couple of hours ago) somewhere over South Dakota, on my way from Portland to Pittsburgh.  Of course, I have to overfly Pittsburgh, and connect in Philadelphia, due to the lack of non-stop flights with the US Airways pull down of the PIT hub.  Rather demonstrative of what’s happening throughout the industry.

Pittsburgh is the site of this year’s JumpStart air service development conference, sponsored by Airports Council International (ACI).  A lot has changed since last year’s JumpStart – when we launched this blog.  As an aside, it’s a blog, I’m aware, I haven’t updated frequently enough!  Since last June many US airlines have been thrown into chaos.Last year we were talking about modest growth in many markets.  In fact, since then, Sixel Consulting Group has seen the launch of a number of new routes we worked on, including our intrastate Indiana service on Cape

Air, Frontier service between Denver and Fargo, and Northwest’s re-entry into

Dubuque, Iowa.  We’re happy to report the latest data shows each of those markets growing, with service well supported.  In fact, our projections were within 7-10% of the actual performance of the route, which is remarkable considering the jump in the price of fuel since those projections were calculated.

Still, the message we’re likely to hear this June – that we didn’t hear last year – is that the airlines are scouring their networks for places to cut.  While we’ll still be presenting the case for new service in many of our markets across the country, we’ll also be stating the case for maintaining all current service.  I’ve read many articles, and heard many stories in the last couple of months, predicting the demise of air service in smaller markets – markets with a limited number of airlines, and without low cost service outside of Allegiant’s point-to-point routes.

At Sixel Consulting Group, we don’t believe small markets will be disproportionally hit.  Sure, there will be long, thin routes cut, and some frequencies reduced, but aside for minor adjustments, we see quite the opposite.

A lot of analysts would say that view is crazy in this day and age – but there’s a reason I believe small markets will survive the latest crisis, and I can sum it up in two words: pricing power. Smaller markets are the last markets in which the legacy airlines have pricing power.  These are the last markets that haven’t been invaded by the Southwests, AirTrans, and Frontiers of the world.  These are the last markets where the legacies can determine what a fair fare is.  These are markets in which the legacies must protect their share and their network feed. Having said that, I don’t expect legacies to add a bunch of flights in smaller markets.  But I don’t see the massive cuts predicted in an airline “doomsday” scenario.

Take our client market, Sioux Falls, for example.  United has transitioned some of its flying away from its Express brand, and onto mainline 737s.  This adds a premium product in a market where there’s no low fare competition (again, outside Allegiant), more available seats at a lower cost than increasing frequencies, and a better opportunity to earn revenue in a market where United can set the fare.  I believe this kind of capacity shift will continue into 2009. Moreover, at some point, history tells us low cost carriers will backfill some of the capacity that’s cut by the legacies.  This is the last thing that the legacies want, but it’s going to happen – probably sooner rather than later.  Southwest has already announced it will add 12% more flying in the next year.  AirTran, jetBlue, Frontier, and Virgin America all say they’ll hold capacity steady over the next year – but I wouldn’t expect zero growth for much longer than that.  When the economy rebounds, and fuel costs quit rising, it’s these airlines that will eventually benefit from the cuts by the big boys.

I could write for the duration of the flight, but there are some storms up ahead, so I need to pack-up, and get ready for some bumps.  But remember, that turbulence the captain warns you about is rarely as bad as he makes it sound like it will be. 

Jack Penning Analyst

Although the Delta-Northwest merger appears to be “on ice” - at least for the moment, Mark and I still believe the airline industry is in for a number of changes this year and next.  With oil topping $110 a barrel, airlines are going to have to consider radical changes just to keep planes in the air.  Among those changes: mergers, that a few years ago, might not have made sense.

The Delta-Northwest merger doesn’t appear to link carriers with a whole lot in common.  Delta flies its fleet of Boeing jets - 737s, 767s, 777s, while Northwest has gone airbus, with its A320-family aircraft and a growing fleet of international A330s.  Delta has hubs in Cincinnati and Atlanta - right next to Northwest’s Detroit and Memphis strongholds.  The route maps overlap a ton - except in Europe, where Delta is dominant, and in Asia, where Northwest has long been the Alpha to United’s Omega.

When we overlapped the Delta and Northwest route maps (from March 2008), the level of route duplication is obvious.  If you click on the following thumbnail you’ll see our combined route map - the routes in blue are Delta’s, and the routes in red belong to Northwest.

Should the two airlines get back to the bargaining table, which Mark and I believe they will, eventually, they’ll not only have to deal with integrating two angry workforces, and two completely different fleets, but two route structures with lots of overlap.  We believe Memphis is just too close to Atlanta to remain a viable hub.  Delta-Northwest (which will likely be known, simply, as Delta) isn’t going to trim flights at Atlanta - the world’s busiest airport.  Memphis will be the airport that loses flights.  Likewise, Cincinnati is too close to Northwest’s Detroit “World Gateway.”  Detroit isn’t going anywhere, as a huge European and Asian gateway, so it will be CVG that gets trimmed.

We don’t see either of these hubs - Cincinnati or Memphis - being cut completely, down to the level of a dot on the route map with simple service to the other hubs.  In Cincinnati it will be more like what American did to its St. Louis hub after it bought TWA.  Lambert went from more than 400 daily departures to about 200 - where it sits today.  It’s still a hub, with non-stop service to more than 60 cities, just not the mega-hub it once was.  Cincinnati will look a lot like that.

The situation is slightly more bleak for Memphis.  The city has the lowest O&D passenger count of any major hub in America.  Northwest currently has about 250 daily departures.  That number will likely be cut to less than 100 departures a day, similar to what US Airways has done to its Pittsburgh station.  Memphis will retain service to all the major business centers, but lose service to secondary cities, faraway cities, and small cities in the south that will have their service transferred to Atlanta for greater connectivity.

Should Delta and Northwest come to a merger agreement, Mark and I expect other airlines to pursue their own mergers, to keep up.  The big one everyone seems to be talking about is United and Continental.  Our sources tell us discussions are underway, but everything is progressing slowly, as leaders at both airlines pay close attention to what Delta and Northwest are doing.

United-Continental is another merger that wouldn’t have made sense before $110 oil.  Again they have divergent fleets, much different corporate cultures, and route maps with major overlaps.

If you click on the following thumbnail, you’ll see the combined United-Continental route map, with Continental routes in blue and United routes in red.

The overlap here is obvious: the mid-Atlantic/northeast, where United’s Dulles hub dupicates much of the route structure of the Continental Newark hub, and the midwest where Continental’s Cleveland hub lies in the shadow of the United hub at O’Hare.  On the east coast, we don’t believe the overlap will be much of a problem.  Both Washington, DC and New York City have such huge O&D, United-Continental can likely support two hubs in the region, although Dulles might be trimmed-back while connections there take a back-seat to connections at Newark.

The Midwest is another story.  It’s unlikely Cleveland will remain a major hub with O’Hare so close.  United-Continental will likely cut Cleveland back, again resembling American’s moves in St. Louis.

This doesn’t begin to address the challenges in integrating workforces, and divergent fleet types - which is a chore far beyond a quick blog.

Should these mergers come to fruitition, which Mark and I believe they will at some point in the next 16-24 months, there will be tremendous pressure put on the country’s other airlines.  Will American try to snatch up someone else?  Will it be US Airways?  Will Alaska be able to remain independent?  Will the LCCs get in on all the fun - with Southwest straying from its business model to grab a partner?  And will the new LCCs be able to survive - Skybus and Virgin America?

All of these changes will be felt at even the smallest US airports.  Many will see service to secondary hubs eliminated.  Others will see service moved to new hubs.  Some will see service end altogether.  That’s why we’re here.  To help your airport navigate the changing air travel environment.

We’re always happy to help your airport understand what mergers could mean for your service, and to develop strategies to make sure your market comes out of the next couple of years in a stronger, more solvent position than its in today.

You can contact Mark or me through the website, or give us a call.

And feel free to use our merger maps in any publications, on any websites, for any purpose whatsoever - commerical or otherwise.

Jack Penning, Analyst

The Department of Transportation has awarded this year Small Community Air Service Development Grants (SCASDG), and once again, Sixel Consulting Group clients got more than their fair share of grant money.  SCG client airports won three grants, worth $1.25 million, which is about 14% of the total $9 million awarded nationwide.

Our clients in Helena, Montana, Terre Haute, Indiana, and Greenville, Mississippi were all awarded grant money for new air service.  And, unlike other award winners, not one of our clients’ grant request was reduced by the DoT - they all received the full amount they requested.

In Helena, the Helena Regional Airport proposal won $450,000 for new competitive air service to Denver.

In Terre Haute, Hulman International Airport won $350,000 for the Airport’s first air service in ten years.

In Greenville, Mississippi, the community was awarded $450,000 for new air service to compete with Northwest Airlines’ service to Memphis.

Since the inception of the SCASDG Program, SCG clients have been awarded more than $7 million in air service development money.  We’re proud that our proposals consistently win more than their share of grant money - allowing our clients to aggressively seek new air service in their markets.

Jack Penning, Analyst

I wanted to take a moment to write about the Small Community Air Service Development Grant program.  Each year the Department of Transportation accepts proposals for new service from dozens of smaller airports across the country, awarding grants to as many as 40 per year.  Sixel Consulting Group clients have been fortunate enough to receive several of those grants - setting a record in 2005 - 2006, with 11% of all grants being awarded to SCG clients.

The Idaho Falls Regional Airport was one of those clients.  SCG secured a $500,000 grant in support of new non-stop service between IDA and Denver, on United Express carrier SkyWest.  CRJ service, with two daily flights, launched in June of 2006.

In the first year, the route has boarded more than 60,000 total passengers, and United has now increased service to three flights a day.  While the financials on the route are proprietary, I will say that it’s done exceedingly well - beating United’s own projections by a significant margin.

The IDA-DEN route is a perfect example of how the SCASD Grant Program should work.  In this case, the Grant provided United with the “insurance” it needed to start the route without a significant financial risk.  The Grant provided the Airport the financial power it needed to recruit a new airline.  In the end, very little of the Grant money will actually be spent - with the vast majority going back into the program to help future airports with their air service development projects.

Right now, we’re awaiting the 2007 Grant awards - which should be announced within the next month.  We have several we feel are strong candidates.  You can check back here to see how we did.

Jack Penning, Analyst

We’ve worked hard over the last couple of years at SCG to develop innovate and eye-catching marketing campaigns for many of our client airports.  Now, some recognition from our peers.  Our campaign built for new Delta Air Lines service in San Luis Obispo has been nominated for one of Airport Council International’s Marketing Awards for 2007.

The campaign, developed by SCG Marketing Expert Lynn Pocan, and Analyst Jack Penning, consists of a number of individual ads for destinations served through Delta’s Salt Lake City hub.  The goal of the campaign is to raise awareness about the new flights, and where they go, while emphasizing how affordable Delta service is.  We wanted the ads to be fun, a little irreverant, and eye-catching.  I think we achieved all three.  And the results have been amazing.  Delta’s seen strong bookings for its first two months of service at SBP.  Here’s an example (and you’ll find more in the “Air Service Marketing” portion of this website):

Our marketing and advertising capabilities really set us apart from other consultants.  We like to think of SCG as a full service agency.  We’ll do your market research, recruit and land new flights, then follow through with excellent, cost-competitive advertising campaigns, to ensure your success.  It’s another example of how we partner with our clients - instead of just working for them.

We’d love to hear your comments!

Jack Penning, Analyst

On Thursday, the Board of Commissioners at the Port of Toledo voted to hire Mark and the rest of the staff to aid in its air service development efforts.  We’re excited to work with Eric Frankl, the Director of Toledo Express Airport, Kris Nichter, the head of air service development and marketing, and the rest of the staff.  There’s plenty of opportunity in Toledo, with a growing metro population, and an increasing reluctance to drive to other airports in the region, such as Detroit.

In Toledo, we’ll work on a “fee per departure” basis.  It’s a revolutionary new way of doing business - and Mark’s brainchild.  We don’t get paid until Toledo Express gets new service.  Mark and the staff will work with the Airport to recruit new airlines, and new routes, to Toledo.  Initially, we’ll do so for free.  Once new service begin’s, SCG will be paid $2 for each passenger who flies on the new route, or new airline.

We think this is a great option for airports that don’t have the money for significant costs up-front, and would rather pay a consultant once new service has launched.  There’s certainly some risk on our end, but it gives us a good incentive to go out and find innovate solutions to air service challenges in our markets.

SCG is the only firm in the aviation industry currently working on a “contingency” basis.  And we couldn’t be more happy to end the week on a high note - as a new partner with Toledo Express Airport!

Jack Penning, Analyst

I’m back in the Northwest and Mark’s on his way, after our four-day trip down to Tuscon, and ACI’s “Jumpstart” program for 2007.  Together, Mark and I conducted almost 40-airline meetings in just 8-hours, on behalf of 8-clients.  We had some meetings that we’re better than others, but really found the airlines receptive to regional growth.  In fact, Mark and I agree that the meetings were much more positive than we expected, with several near-term opportunities for new growth in our client markets.

Everybody seems to call Jumpstart “speed dating” for airlines and airports.  The format works like this: 20 different 20-minute sessions between 8am and 5pm, with three minutes between each, and an hour for lunch.  As I mentioned, Mark and I were in meetings for each of the 20 sessions with airlines including Southwest, Northwest, Horizon, Air Canada, US Airways, United, American, and Delta.

It’s hard to describe the whirlwind day.  The only thing I can say is that it’s the fastest day of the year - and no other day even comes close.

Mark and I are going to be busy compiling all we learned over the next few days.  Some of the information is client-specific, and proprietary, but I’ll be posting our general thoughts about the industry, and growth opporunities, on the blog by the beginning of next week.  If there’s something you want to know about specifically, post a comment here, and I’ll be sure to respond.

As always, you can always give us a call with more specific questions!

Jack Penning, Analyst

Welcome to Sixel Consulting Group’s new home on the internet.  This site has been months in the making – and we’re just starting to add content.  We wanted our site to be a clearinghouse for information on our clients, our projects, and our latest news – and we think we’ve accomplished that. On the front page, you’ll notice a streaming “ticker” along the left-hand side.  We’ll try to update that everyday, with the latest industry news affecting our clients.  We’ll also post our latest links to our most recent news releases there, so you can keep up-to-date on what we’re doing.  Here, on the weblog – or blog – we’ll all be offering short stories and insights, along with answering questions, and giving our views on what’s happening in the industry. We also have sections on our different products and services.  We’re constantly adding to our portfolio of work, so check often to see what new projects we’re undertaking. We hope you’ll make frequent visits to our little corner of cyberspace.  As always, we love to hear from you – so drop us an e-mail and let us know what you think. Jack Penning
Analyst
Sixel Consulting Group
jack@sixelconsulting.com